Blue Lagoon Corporation Cash Budget Problem 1

Sheet1 Problem 1 Blue Lagoon Corporation Cash Budget For the Quarter Ended

Blue Lagoon Corporation is preparing a cash budget for the quarter ended March 31, 2012. The beginning cash balance is $31,000. The company needs to project its cash inflows and outflows to determine the ending cash balance and ensure liquidity management. The cash budget includes estimating cash receipts from sales, collections of receivables, disbursements for expenses, and other cash payments during the period.

The key components of the cash budget encompass the beginning cash balance, projected cash collections from customers, cash payments for expenses including supplies, wages, and other operational costs, as well as capital expenditures and debt payments if applicable. The goal is to forecast the ending cash balance at the end of the quarter, assess the need for financing, and maintain sufficient cash for operational needs. Accurate cash budgeting supports effective cash flow management and financial planning, preventing liquidity shortages and optimizing excess cash utilization.

Paper For Above instruction

The preparation of a cash budget is a vital aspect of financial management for any business, including Blue Lagoon Corporation. It enables management to forecast future cash inflows and outflows, ensuring the organization maintains adequate liquidity to meet its obligations while efficiently utilizing excess cash. This paper discusses the process of constructing a detailed cash budget for Blue Lagoon Corporation for the quarter ending March 31, 2012, emphasizing the importance of projected cash flows, timing of receipts and disbursements, and the strategic implications of cash management decisions.

The first step in preparing the cash budget involves assembling the beginning cash balance, which for Blue Lagoon is given as $31,000. This starting point provides the baseline for tracking anticipated cash movements during the period. Next, the company must estimate cash inflows, primarily derived from sales revenue. To project collections accurately, management considers the company's credit policies, historical collection patterns, and seasonal variations. Typically, a certain percentage of sales are collected in the current period, with the remainder received in subsequent months. Accurate forecasting of these collections is crucial, as they determine the available cash for the period.

In the context of Blue Lagoon, sales projections are essential; assuming they consistently grow or fluctuate based on market trends. For example, if sales are expected to be $170,000 in the first month, with subsequent increases, collections must account for the lag in receiving payments from credit sales. Management often uses a collection schedule or percentage estimates to project total cash inflows accurately. This approach ensures the cash budget reflects realistic receipt timing, which directly impacts liquidity management.

The cash disbursements constitute the next significant component. These include operating expenses such as wages, supplies, rent, utilities, and other recurring costs. Fixed expenses are predictable, whereas variable expenses fluctuate with sales volume. Additionally, capital expenditures and debt payments are incorporated into the disbursement schedule. Management must estimate these disbursements carefully, considering timing and magnitude, to prevent cash shortages.

For Blue Lagoon, projecting disbursements involves reviewing historical expense patterns, supplier payment terms, and upcoming investments or liabilities. Effective forecasting ensures the company can plan for periods of cash shortfalls, enabling the pursuit of short-term financing if necessary, or the investment of surplus funds. The cash budget thus functions as both a planning and control tool, aligning operational needs with available cash resources.

The culmination of the cash budget process is calculating the ending cash balance for each month within the quarter. This involves adjusting the beginning cash balance for each period by adding cash inflows and subtracting cash outflows. The final projected ending balance informs management whether additional financing is required or if there are excess funds that can be invested. Maintaining an appropriate cash reserve is critical for operational stability and strategic opportunities.

In conclusion, the cash budget for Blue Lagoon Corporation for the quarter ending March 31, 2012, serves as an essential financial planning tool. It provides insights into liquidity, highlights periods of potential cash shortages or surpluses, and facilitates informed decision-making. Effective cash management through detailed budgeting ensures the company's ability to meet obligations, optimize cash utilization, and achieve financial stability and growth.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis. McGraw-Hill Education.
• Gibson, C. H. (2017). Financial Reporting & Analysis. Cengage Learning.
• Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance. McGraw-Hill Education.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
• Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2013). Introduction to Financial Accounting. Pearson.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
• Harris, T. S., & Rivkin, S. E. (2012). Financial Management: Principles and Practice. Prentice Hall.
• Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.